U.S. stock futures edge up as yen falls

Year’s rally largely intact as sequestration deadline looms

KateGibson

NEW YORK (MarketWatch)—U.S. stock-index futures on Monday tilted slightly higher in limited trade, with U.S. markets shut for Presidents Day; European shares and industrial metals fell on concerns about the global economy, in particular the euro zone, with Italian elections adding to investor uncertainty.

The yen
USDJPY, +0.03%
continued its decline against other currencies, including the U.S. dollar, after leaders from the world’s 20 largest economies vowed not to devalue their currencies to bolster exports and bypassed criticizing Japan for indicating its expansionist monetary policies would continue.

Worries about an unclear outcome in Italian elections held Sunday and Monday hit European equities, with yields on Italy’s 10-year government notes climbing above 4%.

Futures for the Dow Jones Industrial Average
US:DJH3
rose 6 points to 13,954. Those for the Standard & Poor’s 500 gained nearly 1 point to 1,517.90. Futures for the Nasdaq 100
US:NDH3
rose 3.25 points to 2,764.50.

Crude futures for March delivery
US:CLH3
fell 31 cents to $95.56 a barrel in electronic trade in New York. The more active April contract
US:CLJ3
declined 34 cents to $96.07 a barrel.

And, with a deadline in the battle over the U.S. budget just 11 days away, equity investors are considering whether likely federal spending cuts will spark a market correction from multiyear highs.

March 1 is when $85 billion in reductions to defense and domestic programs through the fiscal year ending Sept. 30 go into effect unless congressional leaders and the White House cut a deal to replace the automatic cuts.

Part of a larger program known as sequestration, the cuts aim to trim federal spending by roughly $1 trillion over nine years.

We’ve been inviting our clients to simply expect volatility, thinking you could see 100-point swings. But it’s not there.
Tim Speiss, EisnerAmper

Economists have warned the spending reductions will dent growth in the world’s largest economy. Treasury Secretary-nominee Jack Lew last week in Senate testimony said the automatic budget cuts “would impose self-inflicted wounds to the recovery and put far too many jobs and businesses at risk.”

Senate Democrats late last week proposed a $110 billion plan to postpone federal cuts that would include tax hikes that Republicans have said they would not go along with.

With the Senate now in recess until Feb. 25, and with Democrats and Republicans far from agreeing to a resolution, investors have been wondering if the lack of clarity from Washington will trigger a sharp pullback in U.S. stocks.

At the moment, “the stock market seems to be somewhat impervious to this matter,” said Tim Speiss, who as chairman of personal wealth advisers at EisnerAmper manages $700 million in assets.

Recalling sharp fluctuations in the market as lawmakers in July and August 2011 wrangled over the budget, leading to a downgrade of the U.S.’s triple-A credit rating by Standard & Poor’s, “we’ve been inviting our clients to simply expect volatility, thinking you could see 100-point swings. But it’s not there,” Speiss said in a telephone interview. The market has lately seen flat sessions but generally remains on an upward trajectory, he noted.

Speiss cautioned that the market could start to see heavy swings if we’re into deep March and nothing has happened in Washington over a sequestration resolution.

The sequestration issue for defense companies is very important, but it isn’t a catalyst for an overall equity-market correction, said Jim Paulsen, strategist at Wells Capital Management. Wall Street has already pushed through Washington’s tussle over a key issue—taxes—this year, and investors have “stepped through” worries about the U.S. economy faltering, a hard landing in the Chinese economy, “the euro blowing apart and, of course, the fiscal cliff.”

Now that investors have received data about continuing recovery in the U.S. housing market and improvement in activity in China and other emerging markets, “you’ve got the same fiscal [issue] going on,” in Washington, but “the landscape for investors has moved a lot over the last sixty to ninety days,” he said.

Paulsen also said investors appear motivated to navigate through Washington’s latest crisis because they don’t want to miss out on rallies. “All we’ve done for four years is have one Armageddon after another,” he said.

In both 2010 and 2011, there were “big selloff[s] in the stock market because of Armageddon. People sold out, then watched it recover and go onto new highs,” he said. “It got a lot people in trouble investment-wise.”

A fund-manager survey by Bank of America Merrill Lynch released last week showed managers continue to see value in equities in the wake of gains so far this year, and about 13% of those surveyed said equities are still undervalued.

Even if Washington “kicks the can down the road, which I think they will, they’ll come up with some half-answer and that’s not enough to stop stocks going higher,” said Adam Hewison, co-founder of financial analysis and information firm INO, who said the market is bullish on a technical basis.

Stocks are finding support from the Federal Reserve’s continued contribution of liquidity, as well as from M&A activity, he said. Last week, AMR Corp.
US:AAMRQ
, parent of American Airlines, and US Airways Group Inc.
US:LCC
unveiled plans to merge, while H.J. Heinz Co.
US:HNZ
agreed to be acquired by Warren Buffett’s Berkshire Hathaway and 3G Capital for more than $23 billion.

“That’s the first time we’ve seen deals that big being done in a long, long, time,” said Hewison. “It gets back to the perception that a lot of stocks are undervalued and…a situation where you can do better in stocks than having your money in the bank [on a] practically zero interest rate.”

Hewison is targeting 1,550 to 1,600 in the S&P 500 in the first quarter.

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